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R&D Tax Credit Calculation Examples

R&D Tax Credits 8 MINS read 19th Nov 2020

See how to calculate R&D tax credits and work out the return on your R&D investment. 

You understand that R&D tax credits can bring significant benefits to your business, and you’re probably at the stage of trying to find out how much you’re entitled to as a reward for your R&D efforts. 

Calculating your R&D tax credit return may seem like a daunting and confusing task. But, it’s straightforward once you understand the basics. Use the R&D tax credit calculations examples in this article to estimate your potential claim value.

R&D Tax Credit Calculation Examples

Work out your qualifying R&D expenditure

First things first, calculating your R&D tax credit entitlement should start by knowing which figures to use. To start, you should break down your R&D project to get a better view of all of the activities and costs associated with it. 

If you’re unsure of what activities qualify for the R&D tax relief scheme, take this online eligibility quiz to find out. 

Keep in mind that although the calculation examples are a great way of estimating the claim value, identifying eligible costs is one of the most complex processes of claiming R&D tax relief. It’s still best to seek advice from a professional to fully maximise your claim value. 

Expenditure ExamplesR&D Project ProportionQualifying CostsTotal
R&D Employees – £80,000100%£80,000 x 100%£80,000
Materials – £20,00060%£20,000 x 60%£8,000
Software – £35,00010%£35,000 x 10%£3,500
Sub-contractors
£10,000
65%
(sub-contractors costs are capped at 65%)
£10,000 x 65%£6,500
Utilities – £10,00020%£10,000 x 20%£2,000
Qualifying R&D Expenditure£100,000

The total qualifying R&D expenditure amount is the figure you’ll see in the examples as the basis for calculating potential claim value.

Calculating R&D Tax Credits for SME – Examples

Companies with either less than 500 employees or with annual turnover below £100m are classed as an SME and can deduct an extra 130% of qualifying costs from their yearly profit in addition to the normal 100% deduction. 

Profit-Making SME Calculation Example

If your SME is profitable, you can claim up to 25p on every £1 spent on research and development. The claim on R&D tax credits can reduce the Corporation Tax by deducting the eligible R&D expenditure from your yearly profit, which in total could save 230%.  

Let’s use an example of an SME that developed a sustainable packaging product and spent £100,000 on qualifying R&D activities. They made a profit for the year of £250,000. 

Calculations £
Profit£250,000
R&D Qualifying Spend £100,000
Enhanced R&D Qualifying Spend£100,000 x 130%£130,000
Revised Profit£250,000 – £130,000£120,000
Corporation Tax£120,000 x 19%£22,800
Corporation Tax Saving£47,500 – £22,800£24,700

The £100,000 is already accounted for as the qualifying expenditure, so the R&D spend needs to now be enhanced by multiplying it by 130%, making it £130,000. The next step is to revise the profit by deducting the R&D uplift from profit, bringing the revised profit to £120,000 (£250,000 – £130,000).

The corporation tax at 19% on £250,000 is £47,500. When subtracting it from the original corporation tax before the claim, the total saving for this R&D tax credit calculation example would be £24,700.

Loss-Making SME Calculation Example #1

If your business made a loss, it can still benefit from the government incentive. However, R&D tax credits are calculated differently to profit-making companies. A loss-making company can surrender a loss to HMRC at 14.5p on £1 spent for a cash tax credit.  

We’ll be using similar figures for this example, so let’s use the previous case of an SME that spent £100,000 on R&D activities, but this time made a loss of (£250,000) for the year.

Calculations £
Profit/(Loss)(£250,000)
Corporation Tax before claim£0
R&D Qualifying Spend £100,000
Enhanced R&D Qualifying Spend £100,000 x 130%£130,000
Revised Loss(£380,000)
Surrendable Losses to HMRC£100,000 x 230%£230,000
Tax Credit Received£230,000 x 14.5%£33,350

The £100,000 spent already accounts as the qualifying expenditure and after multiplying it by 130% the enhanced R&D spend comes to £130,000. This makes a revised loss for the year of £380,000. 

At this stage of the example the loss-making company has two choices. They can carry the additional loss forward for extra tax relief deduction on future profit. Alternatively, the company can decide to surrender losses for a cash now though a tax credit of 14.5% of the amount surrendered as shown in the example above. 

Loss-Making SME Calculation Example #2

There is another R&D tax credit calculation example for a loss-making company worth considering. In this instance, if the company has made a profit before qualifying R&D tax the formula would be different. 

Calculations £
Profit£50,000
Corporation Tax before claim£50,000 x 19%£9,500
R&D Qualifying Spend £250,000
Enhanced R&D Qualifying Spend£250,000 x 130%£325,000
Revised Loss£50,000 – £325,000(£275,000)
Corporation tax saved£50,000 x 19%£9,500
Tax Credits Claimed£275,000 x 14.5%£39,875
Benefits Received£9,500 + £39,875£49,375

This example shows a case where an SME made a profit of £50,000 before R&D spend of £250,000. Enhanced R&D qualifying spent would be now £325,000 (x 130%) which makes the revised loss of (£275,000). 

This calculation example shows how R&D tax credits can benefit a company via a tax saving of £9,500 and payable tax credit of £39,875. 

Calculating R&D Tax Credits for a Large Company – Examples

A company employing over 500 people or with an annual turnover of €100m per year is classed as a large company and is eligible for an RDEC scheme.

Large Company Calculation Example

Large companies can claim RDEC, it is less generous than the SME scheme but still pays up to 13% (increased from 12% in April 2020) of the qualifying R&D costs as a cash payment as opposed to a deduction from taxable profits. 

Calculations £
Profit£10,000,000
Corporation Tax before claim£10,000,000 x 19%£1,900,000
R&D Qualifying Spend £3,000,000
RDEC£3,000,000 x 13%£390,000
Taxable Profit£10,000,000 + £390,000£10,390,000
Corporation Tax£10,390,000 x 19%£1,974,100
Corporation Tax Payable£1,974,1000 – £390,000£1,584,100
Corporation Tax Saving£1,900,000 – £1,584,100£315,900

The above R&D tax credit calculation example shows several steps to arrive at the corporation tax saving. This is a company that made £10,000,000 profit that year with qualifying R&D spend of £3,000,000 and corporation tax of £1,900,000.

Applying the enhanced RDEC rate of 13% on R&D spend of £3,000,000 would return £390,000 above the line credit. Subtracting 19% corporation tax against it would bring a total after-tax benefit of £315,900.

Large companies that didn’t make a profit for the relevant year are still eligible for a full R&D tax credit payout, but are subject to certain restrictions. 

Calculating R&D Tax Credits as a subcontractor

Different rules apply for SME and RDEC subcontractors if you are doing R&D on behalf of another company. 

For example, if a company has outsourced a portion of their R&D project to you, as an SME subcontractor you can only claim up to 65% of the eligible R&D expenditure. However, if you’re a company that falls under the RDEC scheme then you must be a qualifying body, individual or a partnership to be eligible for the costs.

Knowing if you can claim tax relief on your R&D projects is often unclear to many companies – see how we were able to secure payable tax credits of £836,650 for a subcontractor client. 

Downsides of R&D Tax Credit Calculation Examples

Although it is a great way to help you estimate, you should aim to get in touch with R&D tax advisor. The R&D tax credit calculation examples are for information purposes only and you should consider a few of the downsides: 

  • Qualifying R&D spend – Your R&D spend could be higher. Without help from an advisor, navigating eligibility rules can be complicated. Each case is different and knowing which costs qualify for the scheme requires technical knowledge and experience. We’ve come across many cases where a company missed out on the full benefit due to poor identification of the qualifying activities.
  • Backdated claim – It’s important to know when the activities took place so you don’t miss out of the benefits. The start and end dates of a project need to be clear to HMRC in order to claim. If your R&D project started some time ago and you haven’t yet claimed R&D tax credits, you may miss out on some value from the early stages of the project. 
  • Poorly submitted claim – HMRC is strict on how the claim should be submitted. Failure to meet these standards can result in a claim being declined or a potential HMRC investigation. The R&D tax credit calculation examples are created for information purposes only and you should consult a specialist when submitting a claim.

Interested in talking to an R&D tax advisor about your potential claim? Book a free consultation with us or check your eligibility online.

R&D Tax Relief Online Quiz

Eligible companies get an average score of 100.

Check my score

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